Q3 2019 Earnings Call
Thank you for standing by welcome to the Colfax third quarter 2019 earnings call.
Fine all participants are in listen only mode.
So to speak or presentation, there will be a question answer session.
That's a question during the session you already to press the star one thing or telephone please be advised stuff that he's got friends to being recorded if you require any further assistance. Please go to star Zero I would now like I had the GAAP rent, so where do your speaker today Mr. Terry Ross. Thank you. Please go ahead Sir.
Good morning, everyone. Thank you for joining US my name is Terry Ross on Colfaxs, Vice President of Investor Relations. Joining me on the call today, I'm actually tola, President and CEO and Chris six senior Vice President and CFO .
Our earnings release was issued this morning and is available in the Investor section of our website called that's Corp. Dot com, we will be using a slide presentation to walk you through today's call, which also can be found on our website.
Both the audio and the slide presentation of this call will be archived on the website later today and will be available until the next quarterly earnings call.
During this call will be making some forward looking statements about our beliefs and estimates regarding future events and results. These forward looking statements are subject to risks and uncertainties, including those set forth in our FCC filings.
Actual results might differ materially from any forward looking statements that we make today. The forward looking statements speak only as of today and do not assume any obligation or intent Oh, and we do not assume any obligation to update them, except as required by law with respect to any non-GAAP financial measure measures made during the call today.
The accompanying reconciliation information relating to those measures can be found in our earnings press release in today's slide presentation.
Now I'd like to turn it over to Matt who will start on slide three.
Thanks, Terry and good morning.
We're pleased to report another strong quarter, achieving the upper end of our earnings commitment in Q3. In addition, we completed the pivot the bar new Colfax portfolio at the beginning of Q4.
With the sale or the hearing gas handling business, we remain on track to deliver our guidance for the year and Chris Walk you through our financial outlook later in the prison presentation.
Our medical technology segment accelerated for the second quarter in a row with organic growth improving sequentially and we continue to focus on driving near term operational improvements and we're off to a strong start on our CBS journey with DJ ill.
Our fabrication technology business posted another quarter of margin improvement up 290 basis points for the prior year in spite of softer conditions in somewhere end markets. We're on track for a year of global share gain and very strong margin progress.
On slide four you can see the continued growth achieved that de jail.
The business organically grew 4.5% up 100 basis points from the second quarter and an early indicator of the growth potential overtime.
The prevention and rehabilitation product lines grew year on year by 3% marking to return to positive growth for these businesses.
The reconstructive product lines delivered 8% core growth with continued double digit growth in the surgical businesses.
Adjusted EBITDA margin was up 200 basis points sequentially from the second quarter, driven by lower costs and higher productivity.
Seasonally stronger volume in the fourth quarter is expected to bring further margin benefit as we close out the year.
On slide five you can see DJ owes improving growth performance and the potential that attracted us to this business.
The third quarter was another step up to the business and we now expect even stronger organic growth in the fourth quarter. This is a terrific achievement for Brady and the team and reflects the operational service improvements in the early progress the team is making on growth initiatives.
As I discussed in our previous call. We continue to see strong momentum in our reconstructive product line led by our surgical implant business.
We continue to launch innovative new additions like our ultra veight shoulder, our to our ultamate shoulder and empower knee lines, including the launch of our all to be reversed shorts them shoulder product in Q3.
These and other innovations support a healthy pipeline of surgeon conversions.
This strong sustainable momentum reinforces our conviction that we can achieve consistent high single digit growth in reconstructive.
A highlight from the quarter is prevention and rehabilitations returned to growth.
This is a part of the business impacted by past delivery and crust customer service issues.
And we've had positive feedback from our customers on the strong progress this year.
The 15, new prevention rehabilitation product launching in 2019 are the highest in over five years.
Well second half 2019 growth rates.
We will benefit from soft comparisons in 2018, we're investing for growth and have a healthy ramp of new products planned for 2020 to be sure that we can sustain the return to growth in PNR.
[noise] mid Tex growth trajectory is improving a bit faster than we forecasted back in March.
We expect a strong fourth quarter, noting that we will benefit from an extra selling day.
Overall this has been a very good beginning to our journey to ramp to a sustained 4% to 5% organic growth range in the next few years.
On the inorganic growth front, we're working at healthy fun would be jail bolt on acquisitions, they could accelerate our growth next year.
Moving to slide six you'll see that fabrication technology is made additional steps forward on margin overcoming a softer end market backdrop.
Margin was up 290 basis points.
To 15.2% versus the prior year on lower lower margin lower volume.
These up team has continued to execute its operational improvement plan has been proactive about managing price through the cycle.
It's no secret that Theres softness in summer end markets, we're able to partially offset volume driven pressure in North America in Europe with organic growth and the rest of the world.
We're monitoring the environment carefully and the team has clear line of sight to deliver strong margin growth in Q4, even if things are a bit tougher.
Slide seven as a reminder of our successful journey to improve profitability in fabrication technology.
We've had four consecutive years of margin improvement and Sean the team has been able to create 340 basis points of expansion through a wide range of market conditions.
We're driving strong commercial execution, CBS productivity and product innovation to continue to increase margins going forward.
I'll wrap up on slide eight.
As we share a view of the new Colfax and explain why we believe colfaxs heading into 2020 with a stronger and much more valuable portfolio.
We've improved our growth potential.
Jay when he said and have positive long term growth drivers strong brands and market, leading positions on which to build and grow.
Innovation matters in these businesses with plenty of opportunity to drive differentiation and extend or even redefined the solution set for customers.
Well most of the innovation today has been in products. Both businesses are on the front end of along wave of digital innovation potential.
Acquisitions can improve our scale and reach and accelerate technology development and detailed gives us a number of exciting new directions in which to pursue M&A.
We've created a higher margin less cyclical company with better cash flow.
Over 90% of our revenue is now from tens of thousands of recurring customers across the world buying hundreds of run rate type products and services with average purchase price as measured in hundreds or thousands of dollars.
This resilience is on display right now with Colfaxs third quarter total organic growth of 1.3% positive despite the short cycle industrial downturn.
And our new portfolio has terrific optionality with lots of places in which to invest in grow both organically and through acquisitions.
Before I hand, it off to Chris take you through our results and outlook, let me finish by saying that we're on track for what I expect we'll be a very successful transformative year for Colfax in 2019, and our position for strong performance in 2020 and beyond.
Well. Thank you Matt Slide nine shows our results on a continuing operations basis, which excludes year on gas handling business that was divested immediately following the ended the quarter.
Year over year Colfax was up sharply in all measures, reflecting the acquisition of DJ show at our pivot to a higher growth more profitable company, we posted organic growth in the quarter as a result of improvements in DJ Io and effective price cost management at ease of that together more than offset each subs.
Volume decrease.
Gross margins were materially higher due to the structural step up from DJ show and the strong margin performance by either.
Both of which also contributed to higher operating margins.
We continue to invest in DJ operating improvements to quickly returned the business to healthy growth, which also has a balancing effect on the pacing of the margin improvements.
Operating performance for the quarter was slightly ahead of expectations and contributed to our 50 cents of adjusted EPS.
In the quarter, we had a 26% tax rate as we worked our way through the Howden divestiture efforts.
We are expecting the rate to return to the low twentys in Q4.
Looking forward to the full year, we are reaffirming our guidance range of $1.90 to $2 per share of adjusted earnings for the year.
I also want to highlight some important balance sheet developments, when we completed the air and gas handling divestiture at the beginning of the fourth quarter. We use the 1.6 billion in cash proceeds to pay down debt.
In the quarter. We also closed out another large pension, creating a noncash charge of 33 million in our GAAP results.
With this move coupled with many other efforts, including divestitures, we have reduced our pension liabilities by about 80% in recent years contributing to our expected higher cash flows next year.
Concluding on slide 10. This has been an exciting quarter at Colfax, we successfully divested the air and gas handling business and sharply reduced our leverage.
Our new portfolio is structurally more profitable less exposed to cyclical cyclical headwinds and able to generate more consistent cash flow.
Our existing Aesop business continues to execute to take share and make strides and its long term journey of profit improvement.
DJ Joe has clearly returned to growth reflecting market leadership operating improvements in innovation.
We expect to finish the year on a high note and are reaffirming our guidance.
2019, as a breakthrough year at Colfax.
Operator, we'll take questions now from the callers.
Thank you as a reminder to ask a question you would lead you press the star one and your telephone do enjoy your question. Please press the pound key please standby lovely compiled the trading roster.
Our first question comes from Jeff Hammond from Keybanc capital markets. Your line is open.
Good morning, guys.
Jeff.
Just a couple of housekeeping items to start can you give us kind of pro forma leverage since the deal and close by.
By the time or I guess your quarter end and then just on free cash flow I don't know if there's some noise in there around airing gas, but maybe give us a better sense of free cash flow.
The go forward businesses.
Yes fair enough fair enough, Jeff So we're expecting the leverage pro forma to be roughly in the in the neighborhood of 44 turns or for a four times leverage on a pro forma basis and the free cash flow that we've we've seen in the quarter to your point had a bit of noise in it related.
To the divestiture of Howden and so on as we look into Q4, we're going to have a little bit more of that as we pay taxes related to the hadn't divestiture and have some other transaction fees and costs. If you look through all of that we expect to see the free cash flow in the in the quarter being.
Somewhere on a clean basis of say 70 to 90 million and for next year wears we're confident that we can generate the 250 million or more that we previously communicated.
Okay, Great and then.
Just give us a sense of where med tech margins came in versus expectation I mean, good certainly very good topline momentum.
And.
Where was the progress versus Twoq you and.
Are there are there's still some costs, you're taking to kind of right size and fix the business. Thanks.
Yeah, we're definitely pleased with the growth progress.
In Med Tech and we had a nice a couple hundred basis point, a step up in in the quarter consistent with our with our expectations, there, but but we have been clear from the start that that we're making some extra investment there and making sure that that we addressed.
This is supply chain issues proactively as as we have and to make sure that we're investing in the growth of the business.
Okay. Thanks, I'll get back in Q.
Our next question comes from Nathan Jones from Stifel. Your line is open.
Good morning, everyone.
And eight.
If you've got a couple of questions here on the growth in a in the med Tech business Indeed, yeah clearly.
Great step up here at good expectation in the fourth quarter.
And you and you did talk about the highest level of new products in in five years.
And pipeline going into next year, you're going to do close to 4% organic growth in 29 chain, which is well above what you targeted at gross level.
That area sustainable in 2020 is this some agee comps from 29, saying to US is 2018, and we should expect growth to moderate a little bit in 2020 study you thinking about that going forward.
Yes, so first I'd say.
When we had shared or an early on that we expected that we could ramp this business to 40, 45% growth range.
As a consistent growth growth range couple of years out and we still see that.
Very much as a as an opportunity that is getting.
Continually validated here.
And and you know, we're probably a little ahead of schedule on the on the progress there.
Yeah as it relates to next year, specifically, though this year does have a little little bit a tailwind from some backlog clearing and some second half easier comps and the extra day.
We commented on and so yes, we expect that next year will be a very constructive step toward that.
4% to 5%.
Range that.
That we feel very comfortable with for the business in the future.
Okay I was also interested.
In a comment always in the press release that you to where you talked about reconstructive share gains.
Ads Sajan conversion in particular, I think that's probably a pretty important avenues for you to grow and I know surgeons are pretty sticky. So maybe you could talk a little bit about the process that you guys, you're looking to flip those agents to you all products.
And the traction that you've seen so far on that.
Yeah, Yeah sure.
Yeah, our our surgical business has continued to have very nice double digit growth, which which is clearly clearly share gain in that.
Industry, and it's really been a formula for awhile now.
Yes, Brian bringing innovations to the market.
Partnering with surgeons.
Great those those innovations.
Using the success on those innovation to attract other other surgeons and then when filling out the bag with other technologies. So we know we converts surgeons and then we fill out the range of.
The different product to the shoulder surgeon, we've we've got more of the bag at this point, but still actively working on filling out the bag, there and and the hip and knee surgeons, we've still got quite a bit of runway in terms of continuing to fill out the thought the bag. There. The surgeon contains certain conversions continue that's an active process.
Yes, we're constantly working on that we also have a great Fellows program, where we're getting getting surgeons exposed to early on to our products and technologies and brands.
And that becomes a nice a nice feeder pipeline and so we look at both.
Ken, Yes, new surgeon growth or new store growth and kind of same surgeon growth.
Same store growth and those are both on a healthy trajectory that we can see plenty of opportunity to continue.
Okay quick one on the balance sheet and M&A.
Yeah, Chris said, you're about four times on a pro forma basis, Matt you talked about maybe bolt ons to accelerate growth in in the DJ I business, what how much capital.
I would you be comfortable deploying say in 2020.
Nathan as we've talked about with the new portfolio of businesses that we've got here, we have a pretty good clean line of sight in 2020 on a on a healthy level of cash flow that we think gives us plenty of plenty of firepower to continue to build out the businesses that we've got here and that in conjunction with with.
Increasing levels of EBITDA on other things will we think will contribute to and give us the ample firepower.
Okay. Thanks.
Our next question comes from Joe heel Johnno from Cowen and co.
Okay.
Hi, guys morning warning Joe.
Just wanted to shift of fabrication quickly.
And I know, it's a lock in happened between now and when you give your next set of guidance, but as you kind of enter 2020 can you kind of go through like a regional breakdown of where you think those markets stand in like what is the.
Most likely kind of directional movement there.
Yeah sure Joe I mean, yeah as you saw on our results that we saw US a step down here in the in the third quarter and we expect the markets to you know to still.
It will be in a in a tough zone for for the next few quarters here and we're really certainly focused on on making sure that where we show.
Good healthy a year over year margin progress in the fourth quarter and deliver a strong year, you know even with a little tougher markets down the stretch here yeah. We've certainly got some time and work to do on the planning for next year, but if you look at the if you look at the external segment signals most of the industrial GDP signals.
As well as some of this more specific end markets signals.
0.2 things getting more constructive as as we work through next year and back into a positive kind of growth range and down in the back half next year.
That's kind of the external signals at this point that you know we're going to be a you know preparing for a range of possibilities over the next few months here and certainly.
We'll give you an updated our investor day in December in terms of how we're seeing next year as far as this specific regions, both Europe and North America had a you know how to step down here in the quarter.
I think the European step down was was driven probably the most heavily by by Germany, but but also some so knock on effects.
In other places.
On the other hand, we see we see India, India has been a little tougher through the middle of this year and we see that starting to gain some some traction with some some good policy things going on.
And there, Brazil, everybody thought would get better this year, but but took a little longer to get the engine working quite quite right down there, but there's a lot of.
Kind of positive thoughts about about where were Brazil's heading as as we move.
Into next year and yeah, the flow business in China is still not bad some of the some nor project based stuff there is more up ups and downs, but the flow business in China is not in a bad zone.
Pads own either so.
We were we've been focused on making sure we drive share gain.
And as many places as we can and we feel like we've been able to do that.
This year and.
We were going to stay close to those market signals as the year finishes up and make sure that we're thinking proact proactively without productivity and cost actions to be sure that we can continue to show margin progress in that business.
And then if I shift over to digital medical.
Is there anything major left on an operational standpoint that you guys have to take care everybody. It seems like you handle that pretty quickly and and you can just comment at least on the seasonal margin profile next year, obviously, we have a big step up in second half this year versus beginning in year like can we just talking about how that typically looks over a four quarter kind of period.
On the operational front, yes, we had some very important issues to hit right out of the gate and we've worked very well together on again those fully stabilized.
But now we've got a long journey of continuous improvement.
Not just in the in the supply chain the operational aspects of that but but also in the reimbursement processes in the back office processes and so.
A lot of lot of work to do a lot of lot of opportunity there.
But feeling very good about the progress we've made and definitely have gotten a clear signal that.
Some of the real customer paying down the back half of last year into the beginning of this year.
Has has been has been mitigated and now we can work on just making things better and better overtime.
Maybe Chris will talk a little bit about the about the margin path the margin profile in the business typically follows the seasonal sales patterns, which means generally you're going to see stronger margins in the first and fourth quarter and less of margins relative to the full year average in the second then and the third quarter, we think Thats still the primary driver for margin performance in the business.
Yes.
Thanks, guys.
Thank you.
Our next question comes from Nicole Deblase from Deutsche Bank. Your line is open.
Thanks, Good morning.
Hi, there so maybe starting with one on detail I know this year you guys are you talked about how you're benefiting a back from inventory cleaning some easy comps the extra selling day is it possible at all to like quantify how much all of those items are uplifting your organic growth.
Just I'm kind of surprised that you say that you're going to take a step towards 4% to 5% in 2021, we've already seen a 4.5% result, this quarter. So maybe if you could kind of talk a little bit about that the benefits you had this year and how it flows into next year.
Yeah, I met and nickel, we're certainly get get pretty pretty darn specific about that a at our investor day, when we talk about next year.
But I, what I would I'd say is that I think what we've seen year to date, and we're going to see down down the back half of the or is it some incremental tailwind versus a you know versus it being.
The you know the fundamental driver of the improvement I think we've been having some good inherent in underlying improvement in the business, but then.
Little bit a tailwind on on top of that and I think the kind of the.
Kind of growth range that you know that we've been in last quarter and this this quarter.
As is in a kind of in it and a good range, but then we're going to we're going head to better place in the fourth quarter with the extra day, and a little little easier comp and we just want to make sure that.
People understand that some of that is in the year in the year tailwind and we'll need to be backed off before we get to stay but take a step forward next year.
Okay got it that's that's helpful. Thanks, and then maybe just on fab taxi you guys talked a little better about like geographic trends in that business. If you could talk a little bit about you know what you saw from an end market perspective areas that you know got substantially worse during the quarter and if you. If you seen continued deterioration into October or if you've seen stable.
In addition trends.
Yes, sure I, you know I think from an end market standpoint, I think its everybody's talking about how how automotive automotive ticket big step down we've got a little less exposure than to that particularly in North America, but we do participate a kind of down the automotive supply chain in in Germany, and some other parts of of Europe and.
I think definitely some of that some of the step down here in the quarter was was related to some some pressure in that segment in Europe .
I think the oil and gas part of the North American market has has been under some pressure in the last quarter or two and that's yes definitely part of the.
Part of the step down there as well and and then there is some some broader in industrial pressure from from from the tariffs that that's affecting a number of.
Of different.
Segments, and and then finally that I think the yellow goods segments have been pretty public about some of their you know some in some of their significant backlog reductions and changes.
So on the flip side are there. Some you know there's some good areas you know infrastructure in in a number of places in the world the number of even the even the other construction markets.
Our positive there's some someplace in the world, where a wind towers and oil and gas investments.
I have been you know.
On the positive swing so it's a diverse market with a lot of different end uses and geographies I think that's something that gives gives welding. Some some resilience and we were working hard to make sure that we're gaining share and that we're focusing on the areas that are going to grow and you're going to make sure that that we keep improving.
The margin to the business.
Okay. Thanks, I'll pass it on.
Our next question comes from Julian Mitchell from Barclays. Your line is open.
Hi, Good morning, maybe just circling back to the free cash flow.
So in accounts payable and capex each about a 100 million outflow I think in the first nine months, maybe just give us a sense of.
Well using those two items and up for fiscal 19 as a whole.
And also.
In context of that to 50 million Pos free cash guide for 2020 .
How you're thinking about those two items for next year versus this year.
Yes, so julian the the numbers through the first nine months are going to have the three businesses in it that is seeing including the or gas handling business. We've divested. So the numbers going forward will look a little bit different.
You'll recall that we did make a 40 million dollar investment in the working capital of DJ though when we acquired the business to help secure the supply chain and contribute to the operating improvements that we're now seeing reading through in the growth of the business.
40 million is reading through largely in the area in the accounts payable number there youve certainly that's a factor a factor at work.
In addition to that in that number includes near gas handling business. The business that we've divested that includes some other other moving parts that relate to customer projects that you won't see recurring with the existing run rate businesses that we retained in the in the new portfolio.
So it's important to keep that to keep that in mind and then the Capex number includes so the three businesses going forward. We expect the med tech business to continue to have a capex in the range of sort of 4% to 5% revenue of the fab tech business more than 1.5% to 2% consistent with what we've seen.
In the with what we've seen in the past.
Thanks, and then my second question holidays follow up on that one would be around what's the seasonality of the free cash flow in the go forward Colfax.
Do we wait until Q4 to get most of the free cash for the year or is it a lot more lenient now.
And on the balance sheets.
Yes, not many companies talk about a lot of M&A at four times leverage. So just one did you will view is only go forward appropriate leverage level for the company.
Okay. So maybe I'll, maybe I can survey addressing the seasonality the cash flow. We we do expect the cash flow to be a little less.
A little less seasonal heading forward, but it will still retain an element of seasonality as the first quarter that tends to be a strong sales quarter for both of our businesses. So thats going to naturally pulling some working capital investment that you will see good.
Sort of release throughout the course of the year. So we still expect to see the highest cash flow quarter likely to be the fourth quarter and the lowest to be the first quarter for the for those reasons.
On the on the on the balance sheet side as we've talked about the.
The longer term goal of the company is to continue to drive the leverage down into the more closer to the three times on that we've operated that consistently over time with the cash flow that we've got in the in the businesses going forward. We've got the ability to make some of these M&A investments and continue to work the leverage down to the law.
Longer term target.
And and so the cash flow that we've got to the business here for the next.
36 months, or we think will lend itself to a considerable M&A a bolt on activity that continue to build out the med tech and the fed tech businesses.
And just to add to that the funnel that we're actively working now is.
It is aligned with the kind of bandwidth that we'll have over the next 12 to 18 months and so focused on a number of.
You know attractive.
Got smaller bolt ons and maybe some.
Sort of medium size bolt on but nothing in the in the large range is actively being worked right now.
Fantastic. Thank you for the color.
Your next question comes from Joel We keep from Goldman Sachs. Your line is open.
Thanks, Good morning, guys.
More Joe.
So I'd like to see if we can maybe parse out some of the operating leverage that you signed fabtech. This quarter clearly pricing came through very strongly but but pretty impressive margin expansion on a year over year basis, and so I'd be curious to hear you know how much of a tailwind was was price cost this quarter versus.
Just internal productivity initiatives to help drive that that strong leverage.
Yeah, so productivity so it's going to be a part of the story Joe as you know we've got our teams consistently leveraging CBS throughout the businesses to drive that we've also got the various restructuring projects that we found that continued to drive and improve.
And improved cost structure. So those are going to be key elements. If you look at the journey of the price cost management over time.
We are very public about being a chasing the the inflationary costs throughout two to 2017 getting into 2018 that thats starting to stabilize a bit but it had the diluting effect on the margins that we were clear about the substantial impact on the margins and it's only as Weve really got.
Into into 2019 that is stable and and starting to claw back.
Some of the some of the price cost.
Of.
Issues that we had back in 2017, so we're still on the journey to to get back to equilibrium.
But definitely in a better place in 2019 than where we started the journey in 2017.
And along the way the company's really build some some very good discipline and muscle and process around managing price.
We can continue to leverage in the future.
And maybe just comment kind of falling off on that it on the price cost side as you think about it for 2020.
Our lease.
The next few quarters your base metals have been coming down and so it seems like we're in this volatile deflationary period right now and so should should that become a better benefit for you in the upcoming quarters like how are you guys thinking about an internally in your own planning.
Yeah. So first thing I'd say Joe is is.
It varies market by market around the world as to add to weather the cost side is coming down or in fact, even still going up like in South America.
So for us as a as a very global business.
I'd say the net is definitely a little in the down direction, but but theres not any kind of a wholesale.
Drop there.
Second thing I'd say as Chris said you know.
If you look at the longer term journey, yes, we're getting kind of in the range of caught up to where we're getting a little bit a little bit a benefit but we don't feel like we're in a range, where you know we're oh.
We're profiting from the long term price cost to where we're going to need to be kind of path than that.
Thats net back so we think that the margin progress that we've made is sustainable and we continue to make margin progress.
But for sure as price of.
Steel come down in different markets around the world.
The there will be a pass through effect of that in some cases direct pass through and in other cases something that.
More happens over overtime and.
Will you know, we'll be making sure we make thought thoughtful calls about.
How we manage through that.
Hi, Thanks, and if I may just ask one on med Tech. It was it was nice to see the debt the positive momentum and the prevention or rehabilitation side I know that this is an area that.
DJ show a couple of years ago under invested in and it sounds like you've got a lot of new products in that area specifically so.
As you're thinking about the sustainability of this growth rate on the go forward I mean is it.
Just kind of like the starting point of what we should see I'm on the go forward in terms of the momentum and the growth that you see on at least specifically on the prevention or any of those rehabilitations that.
Yeah, so well that's a part of the portfolio, where we've got the most tailwind from some of the operational issues qualifying our clearing through but at the same time, even though we've launched a lot of new product this year.
Yeah. The revenue contribution from them is fairly limited because its combination of large product that small product.
And they've been ramping through the year and so we're in the very early days in terms of the innovation based impact on growth in that business in North America in particular, and so we expect that as as you know we clear.
Some of the tailwind from from clearing the operational issues. We then have got some healthy runway over time in terms of bring bringing through the benefits of the innovation pipeline. Both the things that have been launched this year and and a lot more that are coming in the next to the next few years and then we'll be working hard to to recreate a robust pipeline.
On the back side of that and already have some some very good ideas about the next wave of innovation possibilities book, both in the products and in some of the more kind of connected medicine opportunities as well.
[noise] how great. Thank you.
Our next question comes from Walter Liptak from Seaport Global Your line is open.
Hi, Thanks, Good morning, guys and congratulations on nice quarter.
Thanks Walter.
I wanted to ask a kind of a maybe.
No go a little bit further into the on the DJ Vu surgical business.
And I understand you know with this momentum that you're seeing in the growth rate.
Are there metrics around the number of surgical groups of surgeons.
You can give us.
The thing I'm trying to get to was are we early days with starting to try and went back market share or.
You know as or more penetration that you can do on the market here that we can see in 2020.
Yeah, let me.
Talk little bit about that on the shoulder side of the business, which is the largest part of that business.
That's a high single digit growth market mid to high single digit kind of kind of growth market and we've been we've been gaining share in that market. We are a leader, but but have a small enough share position that theres still ample opportunity to gain share. We've we've been a strong leader in the reverse shoulder part of that bill.
Yes.
But have a.
Smaller position, there and the anatomic and still plenty of opportunity even here in the U.S., where we've got a leading position, but also global expansion opportunity in that in that strong growing shoulder franchise, which is a very healthy market growth market.
Yes in hip and knee those though that's a.
More of a a low single digit growth market, but we've got a very very small share position in that market and so.
Whole lot of runway to have strong growth by taking share.
Without.
You know without needing to become one of the largest players in the market or anything like that and.
There are plenty of surgeons, we don't we don't really stayed about the exact number of surgeons et cetera, but this is.
There are many many many surgeons that make up our position and then many multiples at times.
That that are available still out there for us to for us to grow into.
Okay sounds great and.
With a new products is there a lag between Uh huh.
<unk>.
Surgeon ads and when they start using the prevention and rehab like is it more difficult or easier to convert to the new products.
Like on rehab.
After you've you've won a new customer.
Okay.
You are bracing and rehab product I, just really clear so our surgical products, it's often the new product that attract the surgeons and then we really kind of fill out the rest of what theyre using a overtime.
In our in our bracing and rehab business, we've got very strong.
Channel position very strong position in the clinic in North America with our our motion MD solution and so there you know as as we bring new products to the market were often dropping them into an existing and existing channel position or.
Bringing them onto a contract that data out of key hospital group and and so.
That's a that's being added to existing positions in in most cases or is this the tip of the spi or in our surgical business.
Okay got it and that.
Wanted to ask about the margins with great in Med Tech.
And I wondered if there were still any purchase accounting.
Or stabilization costs in this quarter the don't recur next quarter.
The way we report the EBITDA margins, we exclude the purchase accounting effects from those margins. So that they should be largely a clean margins domestic point, we're continuing to work through the operating improvements in the business. So that's got a bit of a natural drag on the on the margins are really of the purchase accounting is.
As largely out of those numbers.
Okay got it alright, thank you.
Our next question comes from Andrew Obin from Bank of America. Your line is open.
Good morning. This is David Ridley Lane on for Andrew.
David.
Morning.
So we all have the same starting point, what's the comparable fourth quarter 18 revenue number for TJ.
[noise] [noise] [noise] [noise], Sir David gear give us just a check it was just the SEC.
Yeah.
[noise].
Yes, I think we.
You need to be careful currency and different things, David Let me, let me get back you offline I just don't have it here in the in the room.
Got it.
Then.
Just.
On a rough basis, how much annualized cost has been taken out permanent Lan and Tam Tam.
I guess, one I'm trying to think about is that if volumes are down.
Somewhat over the next few quarters is there potential for margins to be flat.
Anyway to sort of size, maybe the fixed cost amount that's been taken out.
Every year in the business, we've taken out typically somewhere between 10 and $20 million at cost and the in the current year is no exception to that some of that benefit does flow from the current year into the following year just as it did in the in 2000 in 2019 the biggest drivers in.
The business tend to be the ongoing productivity the what we do on the on the sales side, the price and volume and then additional restructuring projects that that we put into play.
Got it and last one for me as their benefit to that tech margins from the pension settlements this quarter.
No no that doesn't flow through the biggest benefit that we will get from the from reducing that pension liability down from roughly 1 billion 6 billion seven down to well and you go into the low hundreds of millions is is on the cash flow side in the past we would fund the the pensions that wouldn't be surprising to every year, where you had 40 million or more.
War, and and I'd be surprised if it was much different than 5 million next year. So you can see the substantial improvement in cash flow that contributes to.
All right. Thank you very much.
We do have a follow up question from Jeff Hammond from Keybanc capital markets. Your line is open.
Hey, guys just.
Again, great work on a on the margin side on on you saw.
If we kind of continue in this malays or start to see kind of low single digit growth. What's the confidence level ended 2020, you think you can you can kind of hold the margin.
Where they've done this year on on great progress.
Yeah, I think part of why we included the long term margin picture is to show that good times in bad steel ups deal down we've been able to drive can just consistent margin improvement in the business and even the 18 when it shows flat on the chart. There was this kind of mathematical pass through so theres a lot of under.
Relying a underlying margin improvement and and so you know we continue to do the right things in terms of productivity improvement new products.
Continuing to get after structural opportunities to make sure that we can keep expanding the margins the business.
Within any reasonable range of market situations.
Yeah.
And then just just back to the.
The pipeline and and balance sheet capacity dynamic because I think the messaging before was hey, we're going to spend a year to.
Kind of de lever and it seems like you're more willing to do deals is that.
Is that informed by.
Just what's in the pipeline and whats available or is that informed by you or your view on much more resilient business and cash flow just what's changed there. Thanks.
Yeah, and the one comment I'll make it on like Chris jump in as I think we set out of gay we're going to sort of take this year off in terms of any any meaningfully sized.
Acquisitions and focus on de leveraging and that's what we what we've done.
And made good good progress there.
But our plan from the start was too as you work through this year start to get to work on creating and then working the the funnel of acquisition possibilities.
I would hope to to get back to doing some acquisitions next year and maybe Chris can talk about how we're thinking about the envelope there has not yet and it's still the dual path and we've been vision, which is the continued deleveraging of the business as well as the continued investment in M&A and as Matt outlined the scale and scope of what we're looking at in the M&A its.
It's a big funnel, that's a big funnel of opportunities that fit neatly within the existing platforms, we have it or in or not to not significant steps.
Okay, great. Thanks, guys.
There are no questions at this time please continue.
Great I want to thank everyone for joining us today, and we look forward to updating you on our next call [noise].
Ladies and gentlemen, this concludes today's conference call. Thank you for participating couple now disconnect.